June 28, 2011

There are some warnings being issued from the blog-o-sphere regarding global money market funds. It seems they are under pressure with withdraws, presumably from the Greek Debt Crisis. We have had other mini-runs the past few months (every time there is a hiccup in the PIIGS debt situation).

This one might actually cause some problems. Jim Sinclair has a warning on his site.

If you remember, the last time there was a run on the money market funds, all corporate short-term credit stopped and thus daily functions stopped. The Fed and Treasury started lending huge amounts of cash overnight just to keep companies like GM and GE open on a daily basis.

Corporations and retail short-term money lenders use money market funds to lend companies short-term cash (among other things) to run their businesses, pay their employees, buy raw materials, etc. Like a credit card that you pay at the end of each month that you put all your business expenses on. Imagine if that credit card got rejected in the middle of the month and your customers weren’t going to pay you for another 30 days?

The last run also caused the FDIC to release a statement that they would cover any money market bank account losses to keep small investors from withdrawing their cash from the US Banks. Banks sweep their individual money market accounts each night and hand it over to these larger funds for a higher return on the money. That’s why you get that “huge” return of 1.2 % on money market accounts and that is also why they are not normally covered by the FDIC bank account insurance. If you read the fine print on your mm account, it will say that may have to wait to receive your money because it is in an outside fund and not part of the bank’s accounts.

Don’t panic. Just understand the risks. The last time this happened some people were waiting up to 6 months for their all money market money. GG doesn’t think you will lose your money, you just may have to wait for it or wait for all of it. So, the solution would be have some cash at home and some savings in a regular bank account (or in a couple of banks) in case a major run happens and you need money right now. Based on past experience in 2008-2009, you should already have your liquid cash savings organized in this way. (Side musing: you don’t need all your cash savings split up this way if you don’t want to, just enough for a few months worth of living expenses in case funds should become suddenly “tied up”.)

I hope you are cluing in to the fact that NOTHING IS FIXED and the same things that happened in 2007-2009, will happen again. So, if you were lolled into a false sense of security and have not prepared, do so now.

Martin describes the differences of his model vs. Kondratieff and the similarities. Both are long wave cycles. But while Mr. Kondratieff focuses on charting specific markets, Mr. Armstrong focuses on charting the panics first, then the market the panic might be in. In this way, Martin has back-tested his theory throughout history. Martin discusses the fall of Rome as an example of his 51.6 year cycle.

If you have not read Themis Trading’s White Paper (via zerohedge) on the stock trading going on in “dark pools”, please do. Although groovygirl is not a stock trading expert (or computer expert for that matter), it clears up some confusion, but opens up even more questions.

Click here. Read the summary, video, and full paper (4 pages). Very important.

The majority of global trading is actually going on in “dark pools” or non-public trading platforms across the globe. The majority of this change in trading started on 2007 when trades on the public version of the index dropped from 80% to 30%. Hmm….that timing is kind of interesting.

This explains the huge disconnect in the last 18 months of extreme insider selling (as reported by private investors) but a rising/plateauing DOW and S&P500.

Explains the low volume on the major markets but the obvious major profit from all the TBTF trading houses as if it was 2006 again. Goldman Sachs is not in the banking business, they are in the market platform insider trading business. They have created a dark pool of trading and leased out information about that market for a fee. Apparently, this must be their main profit center since 2007. (No wonder poor NYC traders are out of a job, Sigma X is the only “employee” needed now.)

Themis estimates that only one in four trades are actually recorded on the major indexes intra-day. Thus the index could be much higher or much lower (let’s take a wild guess at which one) than what the ticker says at any given moment during the day. They suggest that May 2010’s intra-day flash crash was actually much lower, up to 25% lower.

This is a major problem. True price discovery is the key to any financial market. How would you know when to buy or sell during the day? How would you know that volatility was much higher or lower than yesterday or the day before?

Lots of other potential problems, especially for pension, mutual, and 401k funds, any fund day-trading a logarithm based on major indices only. Could there be a dark pool for commodities too? At least for their derivatives, I am sure.

Could things be much worse than the stock market technical patterns are telling us?

Groovygirl is not too concerned that the true price and volume of equities will not come to light eventually. The truth will come to the light. Just as the housing market crashed and sent many companies to the gallows, only to be reprieved by the US taxpayer. The problem is that no one will be prepared, no one will have a heads up (except those paying for access to the whole market, so they can calculate the real DOW price at any given moment) .

That was the problem with the unregulated CDS mortgage market, no one knew who owed what and how much. Contagion could only be papered over AFTER the fact. If Themis is correct, we could be looking at this same situation at some point with all the stock market indexes, bonds, currencies, etc. They suggest we have already had a taste of it with the May 2010 flash crash.

Take a look at this analysis of the dark pool trading from Monday: click here.

This tells us that as all eyes are on Greece and it seems calm, even upbeat, looking at the DOW over 12,088, elsewhere, someone is anticipating Italy’s banks’ coming debt implosion.

Groovygirl is very concerned about this dark trading pool, especially since Themis has now put a number on it: one in four trades are really public during the day.

Does this make you feel secure about your 401k or pension fund which are probably trading on the information from just one and four trades? Or has your 401k farmed out your money to a hedge fund that is trading in an unregulated dark pool? Should we be concerned? Should we care? How can the average 401k investor protect themselves or even know there is a risk here? Is there a risk to the individual? Of what?

We can assume based on this new information that there is little transparency in the stock market just as there is little transparency in private swap markets, especially in intra-day trading. The same risk of contagion still exists around the globe and in a wider variety of markets.

This should end well.

The greatest wealth transfer in history is going on right now on the dark trading platforms.